There are three main parties to this case; Flywell Ltd (F), the parent company, Jetover Ltd (J), the subsidiary, and the Australian Pilots Association (APA) which is representing the 200 pilots currently employed by J. F incorporated J as a wholly owned subsidiary of F and appointed four directors for J from the six directors of F. Two hundred of F’s pilots were made redundant and immediately rehired by J on lower wages and entitlement previously enjoyed at F. New pilots hired by F receive 20% more pay and entitlements for the same work than pilots of J. The issue here is that are the original contractual entitlements received at F applicable to the pilots of J? Firstly it must be emphasised that through incorporation J is a separate legal entity from its founder, shareholders and directors as demonstrated in the landmark case of Salomon v Salomon & Co Ltd . Lord Halsbury LC made the judgement that once a company is legally incorporated it must be treated as a separate legal entity. This important legal principle is accounted for in the Corporations Act 2001 s124(1) which states that “a company has the legal capacity and powers of an individual” . Since J is a separate legal entity, it can be argued that the contract between J and its pilots is a new contract which bears no relationship to the pilots’ former contract with F. This is portrayed in Bank of Tokyo Ltd v Kanoon , where the parent (Bank of Tokyo) and the subsidiary (Bank of Tokyo Trust Co) were deemed to be economically one, however under the law, the separation was fundamental and cannot be bridged . Since the pilots accepted the job offer with J, the pilots are no longer employed by F and have no legal right to receive the same wages and entitlements as F’s employees. However, the precedent in the Saloman Case is not gospel and the ‘corporate veil’ can be lifted in certain circumstances . If the company is used: •as a sham to hide the real purpose of the controller
•to avoid existing legal obligation
•to assist in director’s breach of fiduciary duty
•trade with the enemy (e.g. in times of war)
•to avoid tax
•as a puppet for the controller
•to act as an agent in a corporate group
its corporate veil may be lifted to allow the courts to see who is really controlling the company. Ian M Ramsay and David B Noakes define a sham as “something that is intended to be mistaken for something else or that is not really what it purports to be”. It can be argued that J was created as a “mask” by F to avoid its legal obligation to pay its employees the higher wages and entitlements. In Kensington International Ltd v Republic of Congo the existence of sham transactions between Cotrade and Glencore and the corporate nature of Sphynx Bermuda and AOGC as sham companies allowed Justice Cooke of the High Court of England to pierce the corporate veil. It was handed down that debts owed to Cotrade (a wholly owned subsidiary of the Republic of Congo’s state-owned company SNPC) were in fact debts owed to the Republic of Congo as the SNPC and Cotrade were not separate legal entities. Using this logic (precedent) J can be shown to be a sham company as it has no separate existence than to generate profit for F. This will allow the corporate veil to be lifted to show that through complete ownership (F only shareholder) and control (4 directors of J appointed from 6 directors of F) F and J are in fact one and the same. The relationship between F and J meet the criteria to classify J as a subsidiary of the parent company F under Corporations Act s46 . F’s control over J’s board is demonstrated by F appointing the J’s 4 directors. F is the only shareholder of J and thus holds more than half of the voting rights (in fact holds all the voting rights). The avoidance of legal obligation is another circumstance that allows the corporate veil to be lifted. In Gildford Motor Co Ltd v Horne, Horne was contractually obligated to not solicit any...